Some US bank stocks shedding image as risky market investments

People interested in bank stocks could be forgiven if they headed for cover, leaving a trail of ``sell'' orders in their wake. In a week when the nation's second-largest bank corporation announced it is cutting its quarterly dividend to shareholders for the first time in 53 years, investing in banks may seem as smart as using a pasted-letter note to ask a teller for a withdrawal.

After all, some 75 banks failed in 1984, making it the worst year for this since the depression.

Still, despite all this and Bank of America's horrendous second-quarter report, which included an earlier-reported $338 million loss, bank analysts see reason for optimism about bank stocks.

``In general, almost all banks are doing better than they were a year ago,'' said Robert Mellem, vice-president for research in the Seattle office of Piper, Jaffray &amp; Hopwood Inc., a brokerage.

The reason Bank of America is sticking out so sorely now compared with other banks, he says, is that many of them long ago wrote off bad loans to troubled industries and, in some cases, foreign countries.

``B of A just didn't take as aggressive a stance on this as other banks did earlier on,'' he added.

Regional banks were particularly good at getting rid of bad loans early, says Elizabeth Frank, portfolio manager at the Pine Street Fund in New York.

``A lot of regional banks took their medicine in '81 and '82 and wrote off these bad loans,'' she observes. ``They had bad loans in real estate, farming, and manufacturing. They went through a bad period of time. They're being ever so much more careful now.''

``A lot of regional banks have become quite risk-conscious,'' she continued.

``They are avoiding losses and pricing loans so as to make money on them.'' About 9 percent of her fund's assets are invested in bank stocks, including AmeriTrust Corporation in Cleveland, Manufacturers National Bank in Detroit, and Old Kent Bank &amp; Trust Company in Grand Rapids, Mich.

The effect of earlier reforms is not limited to regional banks, notes Charles Holland, a vice-president and analyst at T. Rowe Price Inc., a Baltimore-based mutual fund. While Bank of America was reporting a record quarterly loss, other big banks, including Citicorp, Manufacturers Hanover, Chase Manhattan, and J. P. Morgan &amp; Co., posted big gains.

``A lot of the problems at B of A were unique to them,'' Mr. Holland says. In addition to a failure to write off weak loans earlier, he notes the bank's heavy exposure in agriculture and real estate, particularly in the West.

``Other money center banks were not that involved in these areas,'' he said.

Mr. Holland also sees some virtue in regional banks. ``A large number of well-run regional banks have done an excellent job in the last seven or eight years,'' he says. ``They learned their lessons from 1974 and '75 when they had major credit problems.''

Many more of these banks now have what Mr. Holland calls ``a good credit portfolio. Their nonperforming loans are less than their loan-loss reserves.''

Banks that fit this picture include Wachovia Corporation of Winston-Salem, N.C., Barnett Banks of Florida, and Sovran Financial Corporation of Norfolk, Va. Interest in regional banks stocks is not entirely due to their good management or earlier write-offs of bad loans.

Because regional banks are smaller than big banks, they are seen as potential takeover candidates, particularly if they are in states developing regional compacts that permit takeovers among banks in neighboring states. These compacts were recently upheld by the US Supreme Court.

``With the recent changes in interstate banking, a lot of regional banks are showing high multiples,'' Mr. Mellem at Piper, Jaffray said. ``Many of them are takeover candidates.''

``The smaller regionals are probably all takeover candidates,'' Holland agreed. For many of these banks, a takeover is something they're looking forward to. ``I think many of these [regional] banks have the intent of a possible merger down the road,'' says Martha Locke, an analyst in the Boston office of the Advest brokerage.

Takeovers in the near future are probably more likely in New England and the Southeast, she notes, where regional compacts have already been approved by several state legislatures. It was the New England compact that was upheld by the Supreme Court.

Among New England banks, Ms. Locke sees good prospects for CBT Corporation of Hartford, Conn., Bank of New England, and State Street Bank &amp; Trust Company, both of Boston. Even Bank of Boston, which has been under fire for improper reporting of currency transactions, and has heavy exposure in Latin America, is on her recommended list.

``They've been doing very well,'' she says. ``They've increased their loan-loss reserves and sold their headquarters building last December, which gave them a big infusion of cash.''

As for Bank of Boston's Latin American debt, most of it is to private corporations with assets that can be seized, not governments that are rescheduling debt and delaying payments, this analyst notes.

Not all analysts are so sure interstate banking and mergers should be driving up stock prices. They would prefer to evaluate a bank's present balance sheet, not its future merger prospects.

``Most of these mergers will be marriages between equals,'' says Mark Biderman, an analyst with Oppenheimer &amp; Co., a New York brokerage. ``I think all the speculation has been overdone.''